Introduction (NPA)

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    INTRODUCTION

    A strong banking sector is important for flourishing economy. One of

    the most important and major roles played by banking sector is that of

    lending business. It is generally encouraged because it has the effect of

    funds being transferred from the system to productive purposes, which

    also results into economic growth. As there are pros and cons of

    everything ,the is with lending business that carries credit risk, which

    arises from the failure of borrower to fulfill its contractual obligations

    either during the course of a transaction or on a future obligations either

    during the course of a transaction or on a future obligations. The failure

    of the banking sector may have an adverse impact on other sectors.

    Non-performing assets are one of the major

    concerns for banks in India. NPAs reflect the performance of banks. A

    high level of NPAs suggests high probability of a large number of credit

    defaults that affect the profitability and net-worth of banks and also

    erodes the value of the asset. The NPA growth involves the necessity of

    provision, which reduces the overall profits and share holders value. The

    issue of the Non Performing Assets has been discussed at length forfinancial system all over the world. The problem of NPAs is not only

    affecting the banks but also the whole economy. In fact high level of

    NPAs in Indian banks is nothing but a reflection of the state of health of

    the industry and trade. This project deals with understanding the concept

    of NPAs, its magnitude and major causes for an account becoming non-

    performing, projection of NPAs over next years in banks and concluding

    remarks.The magnitude of NPAs have a direct impact on Banks

    profitability legally they are not allowed to book income on such

    accounts and at the same time banks are forced to make provisions on

    such assets as per RBI guidelines. The RBI has advised all State Co-

    operative Banks as well as Central Co-operative Banks in the country to

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    adopt prudential norms from the year ending 31-03-1997. These have

    been amended a number of times since 1997. As per their guidelines the

    meaning of NPAs, the norms regarding assets classification and

    provision. Its now very known that the banks and financial institutionsin India face the problem of amplications of non-performing assets

    (NPAs) and the issue is becoming more unmanageable. In order to bring

    the situation under control, various steps have been taken. Among all

    other steps most important one was the introduction of the Securitization

    and reconstruction of Financial Assets and Enforcement of Security

    Interest Act, 2002 by Parliament, which was an important step towards

    elimination or reduction of NPAs.

    An asset is classified as non-performing asset (NPAs)

    if dues in the form of principal and interest are not paid by the borrower

    for a period of 180 days. However with effect from March 2004, default

    status would be given to a borrower of dues are not paid for 90 days. If

    any advance or credit facility granted by bank to a borrower becomes

    non-performing, then the bank will have to treat all the advances/credit

    facilities granted to that borrower as non-performing without having any

    regard to the fact that there are may still exist certain advances/credit

    facilities having performing status. The NPA level of our banks is way

    high than international standards.

    One cannot ignore the fact that a part of the reduction in

    NPAs is due to the writing off bad loans by banks. Indian Banks should

    take care to ensure that they give loans to credit worthy customers. In

    this context the dictum prevention is always better than cure acts as the

    golden rule to reduce NPAs

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    NON-PERFORRMING ASSETS (NPA)

    Non-Performing Asset means an asset or an account of

    borrower, which has been classified by a bank or financial institution assub-standard, doubtful or loss asset, in accordance with the directions or

    guidelines relating to asset classification issued by The Reserve Bank Of

    India. An asset, including a leased asset, becomes non-performing when

    it ceases to generate income for the bank. A NPA is a loan or an advance

    where interest and/or installment of principal remain overdue for a

    period of more than 90 days in respect of a team loan. Earlier assets

    were declared as NPA after completion of the period for the payment of

    total amount of loan and 30 days grace. In present scenario assets are

    declared as NPA if none of the installment is paid till 180 days i.e. six

    months in respect of term loan. With effect from March 30, 2004 a non-

    performing asset (NPA) shall be a loan or an advance where: Interest

    and/or installments of principal remain overdue for a period of more

    than 90 days in respect of a term loan. The account remains out of order

    for a period of more than 90 days, in respect of an overdraft/cash credit

    (od/cd). The bill remains overdue for a period of more than 90 days in

    the case of bills purchased and discounted, interest and or installments of

    principal remains overdue for two harvest seasons but for a period not

    exceeding two half years in the case of advance granted for agriculture

    purpose, and may amount to be received remains overdue for a period of

    more than 90 days in respect of other accounts.

    RBI introduced in 1992, the prudential norms for

    income recognition, asset classification and provisioning IRAC norms inshort in respect of the loan portfolio of the Co-operative Banks. The

    objective was to bring out the true picture of a bank loan portfolio. The

    fallout of this momentous regulatory measure for the management of the

    CBs was to divert its focus to profitability, which tell then used to be a

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    low priority area for it. Asset quality assumed greater importance for the

    CBs when maintenance of high quality credit portfolio continues to be a

    major challenge for the CBs, especially with RBI gradually moving

    towards convergence with more stringent global norms for impairedassets. The quality of a bank loan portfolio can impact its profitability,

    capital and liquidity. Asset quality problems are at the root of other

    financial problems for banks, leading to reduced net interest income and

    higher provisioning costs. If loan losses exceed the Bad and Doubtful

    Debt Reserve, capital strength is reduced. Reduced income means less

    cash, which can potentially strain liquidity. Market knowledge that the

    bank is having asset quality problems and associated financial conditions

    may cause overflow of deposits. Thus, the performance of a bank is

    inextricably linked with its asset quality. Managing the loan portfolio to

    minimize bad loans is, therefore, fundamentally important for a financial

    institution in todays extremely competitive market driven business

    environment. This is all the more important for the CBs which are at a

    disadvantage of the commercial banks in terms of professionalized

    management, skill levels, technology adoption and effective risk

    management systems and procedures. Management of NPAs begins with

    the consciousness of a good portfolio, which warrants a better

    understanding of risks in lending. The board has to decide a strategy

    keeping in view the regulatory norms, the business environment, its

    market share, the risk portfolio, the available resources etc. The strategy

    should be reflected in Board approved policies and procedures to

    monitor implementation.

    The essential components of sound NPA management are Quick identification of NPAs, Their containment at a minimum level, Ensuring minimum impact of NPAs on the financials.

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    TYPES OF NPA

    The RBI has issued the guidelines to banks for classified of

    assets in to following categories

    STANDARD ASSETS: Standard asset is one of which does not disclose

    any problems and which does not carry more than normal risk attached

    to the business/banks. These are loans which do not have any problem

    are less risk. Such an asset is not a non-performing asset. In other words,

    it carries not more than normal risk attached to the business.

    SUB-STANDARD ASSET: It is classified as non-performing for a

    period not exceeding 12 months. The account holder comes in this

    category when they dont pay three installments continuously after 90

    days and up to 1 year. For this category bank has made 10% provision of

    funds from their profit to meet losses generated from NPA. With effect

    from March 31, 2005 an asset would be classified as sub-standard if it

    remained NPA for a period less than equal to 12 months. In such cases,

    the current net worth of the borrowers/guarantors or the current market

    value of the security charged is not enough to ensure recovery of the

    dues to the banks in full. In other words, such assets will have well

    defined credit weaknesses that jeopardize the liquidation of the debt and

    are characterized by the distinct possibility that the banks will sustain

    some loss, if deficiencies are not corrected.

    An asset where the terms of the loans agreement

    regarding interest and principal have been re-negotiated or resche